After a strong year with declining vacancy rates in most major markets in 2011, Canada’s commercial real estate sector is expected to continue its winning streak this year, particularly in the second half of the year, according to Cushman & Wakefield Canada.
“The big thing for us is we are getting mixed signals from both the economic indicators and the average consumers as well as the corporations,” said Pierre Bergevin, President and CEO, Cushman & Wakefield Canada. “We are in the position that the first half of the year is going to be soft and uncertain but we are looking at some solidification in the second half in terms of an office demand standpoint.”
In the last days of 2011, Cushman & Wakefield released its year-end report which also included a forecast for economic growth for Canada at just under 3% in 2012 and a prediction that demand for office space “will remain steady, increasing pressure for new property developments, especially in the Calgary and Vancouver markets.”
Bergevin said nothing has happened in Canada or elsewhere in the world to change that assessment. “I havent changed my outlook but I am very closely watching the indicators,” he said. “Actually I might even be more positive but that is based on 10 days in January. Certainly the economic news has been more positive than we expected.”
At the top of the list of positive news is a falling unemployment rate in the U.S. “That is a big driver and most real estate decisions corporately for Canada are made in the U.S. so assuming that they will take the same view North America-wide, that could benefit us.”
Economic indicators are just one piece of the puzzle, however. “The capital markets, the movement of funds, the investment decisions, those are strangely as it sounds, largely disconnected from demand figures and more dependent on interest rates,” he said. “And we have all taken the position that those aren’t going anywhere and money still needs to be placed and with the performance of the equity markets globally where else are you going to put the money?”
While Canadian commercial real estate is a sought-after commodity, Bergevin noted that the foreign forays on the part of firms “has been unprecedented”. “Canadian funds and Canadian invests for perhaps the first time in history, have been a dominant force on the global scale in terms of buyers. So when you interview industry pundits in Asia, Europe and the United States who are the dominant players, Canadians figure in the top two or three and that is really impressive.”
It’s a list that includes Dundee International REIT, pension funds, real estate companies such as Brookfield and Oxford, and many other REITs. “The figures are stagging,” said the Cushman & Wakefield CEO.
At the same time, foreign investors are finding the market for Canadian commercial real estate crowded and difficult to enter. “Canada is a closed market. Trying as an international investor to gain a position in an asset class in Canada, it is very difficult.”
2011 A STRONG YEAR FOR OFFICE VACANCIES
In its recent report, Cushman & Wakefield found that Class A office vacancy rates continued to decline at a rapid rate across the country, down from 6.8% in Q4 2010 to 4.7% Q4 2011. Overall national office vacancy rates dipped from 8.8% to 7.3% from Q4 2010 to Q4 2011, which it describes as “a significant drop.”
In central Vancouver, the Q4 office vacancy rate stayed flat from Q3 to Q4 2011, at 3.7%. On a year-over-year basis, the downtown core’s office vacancy rate declined from 8.1% in Q4 2010 to 7.5% in the same period this year.
Central Calgary experienced the strongest demand of any major Canadian market, with the vacancy rate taking a massive drop from 12.3% in Q4 2010 to just 3.9% in Q4 in 2011. Central Class A office space also had a major decline in vacancy, from 10.6% in Q4 2010 to 1.6% a year later.
Demand has been strong in Edmonton despite an overall year-over-year increase in office vacancy, from 10.3% in Q4 2010 to 11.0% in Q4 2011, due to new space coming to market this year, with a total of 625,000 square feet made available.
Winnipeg had a significant decrease in Class A office vacancy from 6.7% in Q4 2010 to 4.8% in Q4 2011, indicating strong demand for the most desirable space. In the suburbs, vacancy declined from 14.8% in Q4 2010 to 11.5% in Q4 2011. Central Winnipeg’s office vacancy rate remained virtually unchanged in Q4 2011 compared with Q4 2010, at 8.0%.
Leasing demand for all classes of office space in Toronto’s central market remained very active this quarter. Office vacancy for all classes declined from 5.0% in Q3 to 4.7% in Q4 2011; with the Class A market declining to 4.5%. Suburban market leasing activity also picked up in Q4 2011 as major tenants in the insurance and engineering sectors committed to additional space in Mississauga and Meadowvale. Year-to-date absorption in the suburbs will come in close to 850,000 SF, representing a very active year and huge increase in activity compared to 2010, and the overall suburban vacancy rate will end the year at 8.4%.
In Central Ottawa, vacancy saw a slight increase from 5.1% in Q3 to 5.6% in Q4 this year; however, it remains an active market with strong demand continuing, despite the increase. The increase in vacancy can partly be attributed to the completion of the new EDC Building, which added 80,000 SF of sublet space to the central market. In the suburbs, vacancy took a slight dip from 8.7% in Q3 to 8.5% this quarter. In Central Ottawa, vacancy saw a slight increase from 5.1% in Q3 to 5.6% in Q4 this year.
In Montreal, overall office vacancy dipped from 9.2% in Q4 2010 to 7.9% in Q4 2011 and is a market with “almost non-existent options for contiguous space of 50,000 SF or larger.” In the central market, office vacancy rates dropped from 8.0% in Q4 2010 to 6.4% in Q4 2011. The only new supply added to Montreal was in the suburbs, which gained 110,000 SF of new space added.
Class A space in Halifax showed a significant year-over-year decline, dropping from 13.0% in Q4 2010 to 9.8% in Q4 2011. However, overall office vacancy increased only slightly to 8.8% in Q4 2011, up from 8.4% in Q4 2010.
Moncton’s office vacancy rate took a jump from 8.0% in Q4 2010 to 9.3% in Q4 2011, with 34,862 SF of space being returned to market.
In Fredericton, vacancy rates increased on a year-over-year basis, climbing from 3.8% in Q4 2010, to 5.0% in Q4 2011, however, a total of 45,000 SF of new space was added to the market this year.
St. John, N.B. experienced a slight increase in office vacancy, hitting 11.3% in Q4 of 2011 from 10.8% in Q4 2010.
The overall office vacancy rate in St. John’s, Newfoundland continues to decline, hitting a low 3.3% in Q4 2011, down from 4.7% in Q4 2010. St. John’s has the lowest overall office vacancy of any of the cities within Cushman & Wakefield’s report.